JEFFERSON CITY, Mo. — State governments emerging from the coronavirus pandemic built historic cash surpluses as inflation in prices and wages drove up sales and income tax collections.
Now many states are reaping another reward: banking millions of dollars off those surpluses as the Federal Reserve fights inflation with higher interest rates.
“We’re catching both ends of it,” said Missouri Treasurer Scott Fitzpatrick, a Republican.
First, “we received a lot of extra money,” he said. “Now, nominally, we’re benefiting from the increase in interest rates from the Fed.”
Missouri is hardly alone. States ranging from Democratic-led Massachusetts to Republican-led Texas as well as politically divided Minnesota all are sitting on large surpluses that are swelling even further thanks to favorable interest rates on investments.
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As legislatures prepare for their 2023 sessions, governors and lawmakers are proposing to tap into those surpluses to cover tax cuts and greater spending on priorities such as infrastructure and education. Though most states can afford it, financial experts are nonetheless urging caution because of concerns the U.S. could slip into a recession.
“Some of this is what I call a sugar high,” said Phil Dean, chief economist and public finance researcher at the University of Utah’s Gardner Policy Institute. “The growth rates are definitely not sustainable.”
California could be a harbinger of economic trends. After projecting an unprecedented $97 billion surplus just seven months ago, state officials are now forecasting a roughly $25 billion deficit in the next budget. California imposes higher taxes on the wealthy than most states, leading to pendulum-type swings in tax revenues as the stock market rises and falls.
State budgeters labored through abnormally uncertain times since the coronavirus pandemic began in early 2020. As governors ordered shutdowns to try to slow the spread of the virus, layoffs skyrocketed and states braced for huge revenue losses. But federal relief payments put spending money in people’s pockets, labor markets rebounded and the deep downturn was short-lived.
State tax revenues surged well beyond expectations. After back-to-back years of double-digit percentage growth in revenues, states ended their 2022 fiscal years with a record cash balance of nearly $343 billion, according to the National Association of State Budget Officers.
“Budgets are really strong — historically strong,” Tim Storey, CEO of the National Conference of State Legislatures, said as he previewed the upcoming legislative sessions.
Large surpluses put states in a position to benefit as the Federal Reserve raised its benchmark interest rate seven times this past year, making many loans more expensive to slow spending and fight inflation.
Texas projected a $27 billion surplus for its current budget, boosted by strong sales taxes and energy revenues. That’s likely to rise to more than $30 billion when a revised revenue estimate is released in January, said Tom Currah, associate deputy comptroller for fiscal matters. That’s a larger surplus than the annual general fund expenditures of 40 other states.
Republican Gov. Greg Abbott promised during his reelection campaign that half the surplus would go toward property tax relief.
Surging tax revenue in Massachusetts this year triggered a seldom-used state law requiring $2.9 billion to be returned to taxpayers. Large cash balances allowed the state to collect nearly $57 million of interest in October alone — six times the amount earned during the entire 2021 fiscal year.
Minnesota projects a record $17.6 billion surplus for the…
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